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21 Jan 2015

STARTING IN PROPERTY INVESTING

A question related to starting in property investing is probably the most common type of question that gets mailed to me here at Safe Investing South Africa. A lot of aspiring investors are fascinated by real estate. Which does not come as a surprise to me. What drew me to this type of investment is the power of leverage. I find that to be quite enabling for investors with jobs and stable sources of income. Today we look at a property investing reader's question:
"Property Investment
I would like to enter the property investment market. I only have R70,000 which I would like to use as start up capital. I am not sure how flipping for profit works but would like to learn. Secondly I am interested in blogging and not sure how to start. Your assistance will be highly appreciated."
Photos of New Developments that I take: Starting in Property Investing
 Let us start by unpacking "Leverage" or "Gearing":
This simply refers to the ratio of one's debt to their equity.  One invests their own equity (say R70,000 in our case) to borrows some more cash (debt) with the hope of making profits that are higher than the price of that debt (interest). To simplify it further with an optimistic property flipping example:
  • You get an all inclusive homeloan of R450,000 (debt) and invest R50,000 as the deposit (equity),
  • You use the R20,000 to renovate the place in a short space of time,
  •  You then put the property back on the market at R700,000 (I said optimistic OK),
What happened here is that you invested R50,000 to make R200,000 (total profit). This is 300% profit on your investment. R200,000 is a profit from what you spent, not from the cost of the project. You may now pay back the R450,000 holemoan and go for a bigger project or multiple projects. This is how investors use lenders' money to make money for themselves. If you maintain a good credit record, you stand chances of getting very cheap debt (low interest rates).

Important to Remember:
  1. One needs to be having income or financial support because a property can take a little while to sell;
  2. The right time to make returns is when one buys. Buying a property which is undervalued due to non-structural challenges like broken tiles and cracked plaster or chipped paint is always wise;
  3. Nothing beats the location of the property. It has to be in an active market.
Let us now be more realistic as we look at your R70,000. This is how I would approach it:
1. I would start in a Low Cost Area
It is tempting to want to look at the Metropolitan cities but the small towns and townships are offering huge opportunities at the moment. One should always look at the fast growing areas for opportunities. Not to forget to look at the rental demand before one even starts. One mistake we usually make is to look at the rental prices in one area and compare them with rental prices at a different area and draw uninformed conclusions. We should be basing our real estate investment decision on rental yields or returns.

In Gauteng suburbs for instance you will likely invest R500,000 or more to collect R5,000 gross monthly rental and a negative net income. In a tiny town similar to where I will be developing a few flats, you buy a smaller house within a larger erf (land), re-develop the land and get a few tenants. You are most likely to collect way more net income for a similar amount invested.

Low cost areas are definitely not for flipping because of the low property prices. They are for rental income sort of investors. Also important to note is that one develops at a slower pace in smaller South African towns. It is a painfully slow process to get things done. You will need to exercise your patience especially when the municipality is involved. Getting plans for existing structures, and information on restrictions and servitudes on the land is my biggest challenge. When you have gone past those humps, these kinds of investments seem lucrative and cost-effective.

2. Leverage
One could also use the R70,000 as a deposit in a high growth and high rental demand area. You would be better off with a property way below R600,000 as they are exempted from transfer duties.  This option requires one to have monthly income to repay the loan. If you have bought right, you would be in the position to get a positive cashflow when you rent the property out. Or to resell the property at a profit if you are flipping (see the Leverage/ Gearing passage above).
Flipping with a mortgage and on a tight budget is not easy.

3. Form Partnerships
 I would try and get a partner to boost my capital as I am starting in property investing. Choosing this option means that partners should set clear roles and responsibilities.

4. Real Estate Investment Trusts (REITs)
"A real estate investment trust (REIT) is a company that owns, and in most cases, operates income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and even timberlands." Investopedia
One can invest in property through buying REIT shares in the open market. These may also be in the form of real estate Exchange Traded Funds (ETFs). This way you are investing in huge commercial property without the hard work.

When it comes to blogging, it is not as difficult as people think. Most people use wordpress and some, like myself use blogger. Both are free blogging platforms. I will have to do a separate blog post on this one.

Welcome to new readers. I started this journey alone and am encouraged to see interaction through emails that you guys send through the contact me form.

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5 comments:

  1. Wonderful, what a blog it is! This webpage provides useful data to us, keep it up.
    Real Estate and Property Management

    ReplyDelete
  2. ''Low cost areas are definitely not for flipping because of the low property prices. They are for rental income sort of investors'' I STRONGLY DISAGREE, I FLIP FOR ALIVING IN A ONE PARTICULAR TOWNSHIP, I BUY DISCOUNTED PROPERTIES FOR AROUND R 380 000 WITH MINOR REPAIRS I SELL AROUND R 530 000. THE TURNAROUND FOR SELLING IS MUCH SHORTER AS TOWNSHIP STOCK IS LESS SUPPLY AND MORE DEMAND. IN PROPERTY THE KEY IS TO KNOW HOW TO NEGOTIATE A DEAL!!!!!!!!!!!!!!!!!!!

    ReplyDelete
  3. Thanks for your comment Anonymous,
    Is the township where you flip not a low cost area? Townships are great start for flipping because they are low cost areas. I am confused as to what other area is lower than the townships. Please share.
    Thanks for your comment.

    ReplyDelete
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